Despite rebound, rupee is undervalued: Arvind Mayaram

The REER refers to nominal exchange rate that has been adjusted for inflation and purchasing power differential between two currencies.

NEW DELHI: A top finance ministry official on Monday said the rupee remained undervalued despite the recent rebound.

"There is something called intrinsic value of rupee. The intrinsic value of rupee comes from its purchasing power. The intrinsic value of rupee in real effective exchange rate (REER) terms could be somewhere between 58 and 60 (to a dollar)," said Arvind Mayaram, secretary in the Department of Economic Affairs, while addressing a function organised by industry lobby Ficci.

The rupee closed at an all-time low of 68.80 on August 28. The currency has since recovered more than 8%. The REER refers to nominal exchange rate that has been adjusted for inflation and purchasing power differential between two currencies.

Mayaram said he agreed there will be capital outflows from India when the US Federal Reserve decides to curb its monthly bond-buying programme, but added the government has enough "ammunition" to deal with the situation.

"I do believe when tapering happens there will be outflow of capital, but the fact also remains that we have enough ammunition... And, therefore, there is no room to be fearful of the rupee tanking," he said.

The US Fed had last week surprised the markets by deferring a decision to scale down its $85-billion bond-buying programme till the time there was more evidence of growth recovery in America.

The Indian currency had depreciated sharply after the US Fed first announced its intention to reduce the monetary stimulus on May 22, forcing the Indian government to announce a host of measures to check the current account deficit and spur capital inflows.

Mayaram said the country had foreign exchange reserves of $270 billion, and if they continued at the current rate, there could be about $40 billion additional capital inflows this year, adding that the government expects about $36 billion in foreign direct investment this year. In the first quarter, the country received $9 billion in FDI.

The DEA secretary said India had signed a $50-billion currency swap pact with Japan. Also, Brazil, Russia, China, India and South Africa have firmed up a $100-billion contingency fund.

Mayaram said he expected India's growth to bounce back to 8% in two years. "We are not satisfied with 5% growth. India's potential rate of growth is 8%. In the next two years, India will again start growing at 8%," he said.

India's GDP growth dropped to a four-year low of 4.4% in the first quarter of the current fiscal. In 2012-13, economy grew at a decade's low of 5%.

Mayaram said the decline in demand for bulk diesel, prices of which have been deregulated, will help the government save about $1 billion this fiscal.

He said the government was working on various ideas to encourage investments in infrastructure.

"In the next 2-3 months, there will be greater deepening of the equity and bond markets for financing of the infrastructure sector," he said. On the debt side, Mayaram said the government was trying to get the Employees Provident Fund Organisation (EPFO) to invest in infrastructure projects. "The employees do not have an appetite for risk", he said on the issue of EPFO not investing in equity. "We need to build the confidence in them that it is safe investment."